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Lesson 2 The power of Compound interest

"Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't, pays it." - Albert Einstein

Why did Einstein say this?

He said it because the mathematics of compound interest are astonishing, especially in regard to the growth of money and wealth.

In the last section we talked about how putting your money to work for you and then using it to buy things is powerful, much more powerful than paying cash.

Today we're going to look at exactly how powerful compound interest is, and then look at how much taxes will take from that power.

Let's say that you find an investment that gives you at 100% rate of return. That's a pretty good rate of return, right?

You put in $5, you get $10 back.

Put in $100, you get $1,000 back.

And so forth.

So my question is: if you start with $1...

...how much money will you have after 20 years if you do it every year?

That's right - it's over a million dollars.

Can you believe that? That's the power of compound interest. Compound interest makes $1 into a million $$ in only 20 years.

What if we were able to put our money into a place where it made compound interest?

But let me ask you this: what about taxes? Let me show you what taxes will do to your compound interest on your money....

Let's say you're in a medium tax bracket - not even high bracket, just a medium one. Let's say it's 17% in taxes.

Look how much the government is taking in taxes. Check my math!

You went from over a million dollars to $177,000.

Do you want to pay this much in taxes?

I sure don't.

So the real question is: what matters more? The rate of return? Or taxation? Will it really profit you to make 8% or 10% or 12% rate of return if you're paying 15% or 20% or 35% in taxes?

What if there were a financial strategy in which you could make compound interest on your money without any income taxes at all?

Would you want to take advantage of that strategy?

That's exactly how the growth of wealth works within a whole life insurance policy. This is why wealthy people almost always buy whole life insurance because they understand this concept.

I'll tell you something else.

B.O.L.I.

Know what that stands for?

Bank Owned Life Insurance.

Banks own more whole life insurance than everyone else combined. Because they are in the money business, the business of money flow, buying and selling and buying and selling. They can't afford to have the government taxing them at every turn.

Banks in the United States own tens of billions of dollars worth of whole life insurance. In fact, it's one of their "tier 1" assets. The only thing that banks own that is worth more than their whole life insurance is their real estate. Think about that.

So if they own these policies and we don't, are they being dumb....?

or did we miss something....?

What we really need is to not just own high cash value whole life insurance, but to develop a strategy to use policies to move money in the same way the banks do.

That way we can create money in motion, exactly like the banks do, and create far more wealth than we otherwise ever could.

Credits:

Created with images by Rachel Davis - "untitled image" • skeeze - "einstein albert classroom" • ArtsyBee - "mathematics maths computer" • Nicholas Sampson - "On Top Of The World" • Etienne Martin - "columns on montreal building" • NikolayFrolochkin - "dollar money cash money"

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